Biotech investing is not for the faint of heart. But it's also not an impossible industry for the everyday investor to make a profit in. In fact, smartly investing in biotech can be quite lucrative. The problem is, there's a lot of bad advice out there, from your neighbor who gives you a "hot stock tip" about a company trading on the Pink Sheets to well-known financial media outlets that try to help you time the market. (Which, for the record, is a terrible idea.)
Here you'll find some legitimate tips to help you avoid some common pitfalls and earn thousands investing Foolishly in my favorite industry.
Follow the lead of the true industry experts
Unless you're a biochemistry Ph.D., it's a good bet that the brilliant minds running the leading drugmakers have a better idea what they're looking at in a biotech pipeline than you do. The best way to harness their expertise is to look where they're placing their money. For instance, Celgene (NASDAQ:CELG) is practically engaged to Juno Therapeutics (NASDAQ:JUNO) at this point. There are plenty of CAR-T immunotherapy developers out there, yet Juno is the one Celgene chose for a $1 billion partnership deal involving an equity investment, as well as access to Juno's pipeline. That's a big vote of confidence that Juno is the CAR-T developer to watch, and I'd have to think long and hard about putting my money in one of its competitors.
Keep an eye on cash burn
Most small biotechs are losing money. When you buy into a clinical-stage company, you're buying a piece of the potential future revenue pie, and you (hopefully) know full well that the profitability just isn't there yet. This isn't necessarily a bad thing. However, if your biotech's pile of cash is dwindling down to nothing quickly, get ready for your slice of that future pie to shrink. Shareholder dilution is one of the biggest reasons biotech companies' share prices fall. To protect yourself, calculate a cash runway by dividing the amount of cash the company has by the amount it spends per year. If the result is less than one year, I'd consider that a strong sign that a round of dilution is coming up.
A great example is MannKind Corporation (NASDAQ:56400P706), a company that's had round after round of share offerings, diluting its shareholders more and more as it struggles to market its only drug, an inhaled insulin named Afrezza. Most recently, shares tanked 27% in a single day when yet another round of dilution was announced. This move would have come as no surprise to anyone keeping an eye on the company's cash level. Even management made it perfectly clear that it had enough to keep the lights on only until the end of 2016.
Take your emotions out of it
Biotech is filled with emotion. And it's easy to see why: We're talking about companies that can save lives and ease human suffering. We're also talking about an industry that attracts copious numbers of at-times-greedy investors. Whether the emotions come from a noble place or not, it's a volatile industry. The Motley Fool keeps tabs on all publicly traded companies of a reasonable size, and when one moves up or down 10% or more within a given day, we'll usually write up an article explaining why. I can't tell you how many of these I've seen that amount to "biotech is crazy volatile and there's no new news on this company." These articles are a great reminder that it's best not to fret over daily fluctuations in share price that are immaterial to the investing thesis. Keep your eyes on the prize, and don't buy high and sell low just because the market's having a bad day. Long-term investing is all about levelheadedness, and that's how real money is made from an investment portfolio.
Kristine Harjes has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Celgene. The Motley Fool recommends Juno Therapeutics. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.